Moody's downgrades Saka Energi to B2; reviews ratings for further downgrade

(Singapore, January 07, 2021) -- Moody's Investors Service has downgraded the corporate family rating (CFR) and the senior unsecured rating of Saka Energi Indonesia (P.T.) to B2 from B1. At the same time, Moody's has placed the CFR and the rating on the senior unsecured notes on review for downgrade.

The outlook on all ratings has been changed to rating under review from negative.

"The downgrade reflects our expectation of a lower likelihood of financial support from its parent, Perusahaan Gas Negara (P.T.) (PGN, Baa2 stable), following Saka's partial repayment of its shareholder loan," says Hui Ting Sim, a Moody's Analyst. "We view the repayment as effectively a cash extraction by PGN that will weaken Saka's liquidity at a time of subdued oil prices and while Saka still likely has to pay a significant $127.7 million tax penalty."

"The review for downgrade reflects the heightened liquidity risk at Saka after its payment to PGN, especially if the company is also required to pay the full tax penalty to the Indonesian tax authorities over the next 12 months," adds Sim.

Moody's review will focus on Saka's liquidity profile. More specifically, the review will focus on 1) the outcome of Saka's discussions with tax authorities to seek affordable payment terms; 2) its access to financing, and 3) the management of its operating and investing cash flows. Moody's expects to conclude the review within 90 days.

RATINGS RATIONALE

On 5 January, PGN announced[1] that Saka will repay $77.6 million of the $155.2 million shareholder loan owed to PGN on 6 January 2021. Meanwhile, the maturity of the balance $77.6 million will be extended by one year to 6 January 2022. Saka had cash and cash equivalents of $268 million as of 30 September 2020, and will use internal cash for the partial repayment.

The partial repayment deviates from Moody's earlier expectation that the maturity of the shareholder loans will be extended without any repayment. This development also diverges from PGN's original intention expressed in August 2020[2] that it will extend the shareholder loan by two years.

Saka's partial repayment of the shareholder loan will reduce its liquidity buffers to weather lower oil prices and service its tax penalty. The tax penalty relates to the 2014 purchase of a 65% stake in Pangkah block by Saka from Hess Corporation (Ba1 stable). It already paid $127.7 million to the tax authorities in April 2020, and the company is liable to pay another $127.7 million of penalty. Saka's liquidity will be strained if it has to pay the full $127.7 million over the next 12 months. The company is currently discussing the potential for affordable payment terms with the tax authorities.

Saka currently has limited bank lines available, and its access to financing will likely be constrained by the uncertainty around its role and relevance within PGN and Pertamina (Persero) (P.T.) (Baa2 stable) corporate structure. Its liquidity will also be weak if the company is unable to secure an extension from PGN on the maturity of its $361 million in shareholder loans due January 2022.

Oil and gas production at Saka fell to 25.7 thousand barrels of oil equivalent per day (kboepd) in the first nine months of 2020 from 34.4 kboepd in 2019. Moody's estimates Saka will produce around 23-27 kboepd of oil and gas over the next two years. Moody's also expects Saka will maintain capital spending at low levels around $100 million per annum to preserve liquidity.

The one-notch uplift from parental support incorporated in Saka's B2 ratings takes into account (1) the cross-default clauses between PGN and Saka, and (2) the reputational and funding risks to PGN and its ultimate shareholder, Pertamina, should Saka default.

ESG CONSIDERATIONS

Saka's ratings consider the high environmental risk it faces through its oil and gas operations. Specifically, oil and gas exploration and production companies such as Saka are exposed to very high carbon transition risk. However, this risk is mitigated by the very high proportion of natural gas in Saka's production mix, which accounts for about 83% of total production.

Saka is also exposed to social risks, especially in terms of responsible production and health and safety issues. However, this risk is mitigated by the company's long track record of operating its businesses without any major incidents.

In terms of governance considerations, the rating incorporates Saka's concentrated 100% ownership by PGN and its status as a private company. Despite being unlisted, Saka publishes quarterly financial statements and maintains a reasonable degree of transparency of its operating performance. Today's rating action considers the governance risk stemming from PGN's request for Saka to partially repay its shareholder loan, and its implications on Saka's financial profile.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's will downgrade Saka's rating by at least one notch if the company's liquidity profile continues to deteriorate. This could arise from, among others, Saka being unsuccessful in seeking affordable payment terms from the authorities to pay its tax penalty. Moody's could also downgrade Saka's rating if (1) the company continues to repay the shareholder loans; (2) PGN does not extend the maturity of the outstanding shareholder loans; (3) Saka's financial profile is materially hurt by amendments to the terms of the shareholder loans; or (4) there is a material change in Saka's ownership structure.

On the other hand, the ratings could be confirmed at current levels if Moody's assesses that Saka is able to improve its liquidity and credit quality to a level consistent with its current standalone profile.

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Saka Energi Indonesia (P.T.) is an independent oil & gas exploration and production company in Indonesia. The company holds working interests in eleven oil and gas blocks, six of which are producing. In the first nine months of 2020, Saka reported net production of 25.7 thousand barrels of oil equivalent per day.

Saka is wholly-owned by natural gas distribution and transmission company, Perusahaan Gas Negara (P.T.) (PGN). In turn, PGN is 56.96% owned by Indonesia's 100% state-owned national oil company, Pertamina (Persero) (P.T.).  (ends)